Private-equity investment in independent E&P companies has grown to more than $10 billion and more capital is becoming available, said Jim Parkman, co-founder of Parkman Whaling LLC, speaking to attendees at Oil and Gas Investor’s Energy Capital—The Workshop: Starting and Building An E&P Company held recently in Houston.
“The industry is finally making a lot of money. Independents’ values are now very liquid and they have access to very inexpensive capital. Small E&Ps have probably never been stronger from a financial point of view,” he said.
Private-equity firms are more risk tolerant and have developed extensive relationships with independent energy producers. Meanwhile, both the capacity and incentive for even larger deals is growing, in both the number of interested private-equity investment firms and access to them. Such firms have more influence on both asset and merger markets, and that influence is growing as well.
Small producers and start-ups must consider the effect that management’s track records have in ensuring access to adequate private capital. Having a proven track record can run the gamut of having a stellar track record to no record. The better the track record, the more credibility with investors and thus the less collateral or control must be given as security to the capital provider.
“There has been a sea change of institutional investment into alternatives. And by alternatives, private-equity providers are not referring to solar or wind energy. They are referring to anything other than stocks and bonds. For the past several years, private-equity entities have beefed up energy commitments to some $10 billion,” he said.
“There is probably capital available if needed and it will grow in the future.” Such growth is important because private capital is one of the main drivers to transition start-ups to corporate sales or going public. Some start-ups that began with “sweat equity” were later funded by private equity before going public.
Another source of funds is a local or regional banker in the E&P chief executive’s hometown.
“Even a CEO’s savings and personal net worth is important” he said. “Some people have mortgaged their homes and maxed out their credit cards.”
Also, Parkman advises owners or managers who target growth to look for role models such as Joe Foster, who started Newfield Exploration Co., or Aubrey McClendon, founder of Chesapeake Energy Corp.
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